Can U.s. Trade Stand Apart?

We hear a lot about America’s soaring trade deficit. That deficit has zoomed past $150 billion, and the United States Commerce Department estimates that every billion dollars costs the country twenty-five thousand jobs.

It seems that we’re getting clobbered, and there’s plenty of talk about fighting back. It makes sense, doesn’t it, to pass legislation to protect American producers from foreign competition?

Let’s take a look at one of the bestknown pieces of trade legislation in American history, the Smoot-Hawley Tariff Act of 1930.

World War I had made the United States a creditor nation: the world owed us more than we owed the world. In the twenties we raised tariffs in response to pressures from domestic agricultural and manufacturing interests, and thus we made it more difficult for debtor nations to service their debts to us through exportation. At the same time, we made foreign loans to keep our own level of exportation high.

Francis Bowes Sayre, assistant secretary of state under FDR, offered a lucid analysis of the consequences of this policy in The Way Forward , a study of international trade published in 1939. “In effect,” Sayre explains, “we were … shipping exports in return for promises to pay and at the same time by our tariff policy we were making it progressively more difficult for our debtors to honor their promises. Our loan and tariff policies thus had the effect of adding to the economic dislocations and tensions of our debtors.”

This house of cards collapsed in 1929. Anxiety about the quality of our loans abroad led to a contraction of credit. “Debtor nations … had neither time nor opportunity to reorganize their economies,” Sayre writes. “Credit structures were smashed; price deflation and fluctuation of currency values shook the financial foundations of even the strongest nations.”

In the United States, protectionists argued that if we raised tariffs even higher, we would check the Depression, stimulate business, and create jobs for American workers. High tariffs would ensure a “high degree of self-sufficiency,” said Sen. Reed Smoot of Utah, while the congressman Willis C. Hawley of Oregon said that high tariffs would make the nation “self-contained and self-sustaining.”

Not so, said more than a thousand members of the American Economic Association, who signed a petition denouncing the Smoot-Hawley legislation. The economists predicted that the bill would lead to higher prices here and thus to a lower standard of living, and that it would cause other nations to retaliate with higher tariffs of their own, thus closing markets for our exports and producing increased rather than decreased unemployment. President Hoover ignored their warning.

In response to Smoot-Hawley, international trade collapsed. New tariffs were enacted almost immediately by Canada, Cuba, Mexico, France, Italy, Spain, Australia, New Zealand, Great Britain, and the British dominions. Not wishing to be left out, India, Peru, Argentina, Brazil, China, and Lithuania joined the hightariff club in 1931.

The value of American exports fell from $5.2 billion in 1929 to $1.6 billion in 1933—a decline of 69 percent. World exports fell from $33 billion in 1929 to $11.7 billion in 1933.

In short, Smoot-Hawley turned out to be exactly what the economists had predicted—a complete disaster. That doesn’t mean that similar policies would lead inevitably to disaster today, but it does suggest that a bit of caution might be in order. As the Wall Street Journal wrote in an editorial about an importsurcharge bill that Congress considered in the summer of 1985, the “grim ghosts of Mr. Smoot and Mr. Hawley must be watching with glee.”

Whenever I hear one of our captains of industry explaining why his company needs protection from “unfair” foreign competition, I think of the nineteenthcentury French economist Frédéric Bastiat.

On behalf of the manufacturers of “candles, wax-lights, lamps, candlesticks, street lamps, snuffers, extinguishers,” and so on, Bastiat composed what he obviously hoped would be the protectionist speech to end all protectionist speeches:

“We are suffering from the intolerable competition of a foreign rival,” Bastiat’s beleaguered manufacturers moan, “placed, it would seem, in a condition so far superior to ours for the production of light that he absolutely inundates our national market with it at a price fabulously reduced. The moment he shows himself our trade leaves us. … This rival … the sun, wages war to the knife against us.”

From this merciless competition, the manufacturers demand relief: “What we pray for is, that it may please you to pass a law ordering the shutting up of all windows, skylights, dormer-windows, outside and inside shutters … by or through which the light of the sun has been [accustomed] to enter houses, to the prejudice of the meritorious manufactures with which we flatter ourselves we have accommodated our country.”